Update: The Wall Street Journal is reporting that the AIG board has decided not to participate in the lawsuit.

Hank Greenberg didn’t get to where he is today by being timid. The former chairman of AIG built the company up from humble beginnings in the 1960s to become the world’s largest insurance company, before a 2005 accounting scandal forced Greenberg to step down. But he remained a major shareholder through the U.S. government’s 2008 bailout of the company, when the feds took an 80% stake in the firm in exchange for an $85 billion loan, which saved the company from certain bankruptcy. (The bailout eventually ballooned to $182 billion loan in exchange for a 92% stake.)

But Greenberg isn’t thankful for the rescue. In fact, he thinks we the taxpayers ripped him off in the deal, and he will meet with AIG’s board today in an attempt to convince the company to join his company, Starr International, in a law suit against the federal government, according to a report yesterday in The New York Times.

The suit does not argue that the bailout was unnecessary, but rather that the government exploited AIG’s near-bankrupt position to extract unfair concessions — concessions it did not require of other bailed-out financial institutions. Furthermore, the suit argues, the government used the company to issue “back-door” bailouts to financial institutions across the world. Greenberg is demanding $25 billion in damages to make him and his fellow AIG shareholders whole.

The news that AIG is considering joining the suit has sparked outrage across the financial media. The New York Times pointed out the irony of the decision to sue being made behind the scenes while AIG has been running a high-profile ad campaign thanking America for its investment, and touting the fact that it has recently paid back the bailout funds in full. Forbes called Greenberg and his allies “ungrateful souls” and argued that if AIG joined the suit, it would ultimately “kill” the firm. The Washington Post called Greenberg’s view of the bailout “patently ridiculous.”

On the other hand, in July the U.S. Court of Federal Claims denied the government’s attempt to have the case thrown out, although a similar suit was dismissed from U.S. District Court in November. So do Greenberg and his allies have a point?

Well sort of, but it’s probably not the point they would like to make. Greenberg argued in his initial 2011 complaint that the Federal Reserve gave out loans to many different financial services companies at lower interest rates, and without demanding that the government take a huge ownership stake in return. This is true. But those institutions were either banks that were already closely regulated by the Fed or became bank holding companies and submitted themselves to Federal Reserve regulation in return for access to the Fed’s lending facilities.

AIG, on the other hand, was not a bank then and is not a bank now. It’s an insurance company whose financial products division – which sold billions of dollars in unregulated insurance protection against toxic real estate securities – helped sow the seeds of the 2008 financial panic.

The government would have liked nothing better than to allow AIG to fail, but the fact that the company sold protection against the very subprime mortgage securities that were bringing Wall Street down all around them made its survival paramount to the survival of the global financial system in general. If financial institutions across the globe couldn’t count on AIG to make good on the insurance it sold, there could have been a domino effect that brought down dozens of other banks across the globe. As Ben Bernanke described it in a 2009 interview with 60 minutes:

“Of all the events and all of the things we’ve done in the last 18 months the single one that makes me the angriest . . . is the intervention with AIG. Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system.”

The other argument Greenberg makes in his suit is that AIG was seized in order to use the firm as a conduit for “back-door bailouts.” It is on these grounds that his lawyers claim that the action violates the 5th amendment, which bars the government from taking private property “for public use, without just compensation.” The complaint argues that the government purposefully played a game of brinksmanship with AIG, repeatedly telling the firm that it wouldn’t bail it out so that the government could snap up the firm at a fire sale price and use it as an instrument to filter bailout money to banks across the world.

This is a more interesting argument to consider, because the government has long been criticized for using AIG as a tool for bailing out other institutions. In November of 2008, then-President of the New York Fed Tim Geithner made the decision to terminate the more than $60 billion in insurance contracts between AIG and several large banks, which covered losses in complex financial instruments that were then swiftly declining in value. Instead of negotiating with the banks, however, and forcing those banks to take losses on contracts, Geithner decided to reimburse the banks 100 cents on the dollar. As Neil Barofsky, former Special Investigator General for TARP described it in his recent book Bailout:

“The deal was a gross distortion of the normal functions of the market. In a bailout free world, instead of being saved by the government, AIG would have been unable to make its cash collateral payments to the banks and gone into bankruptcy. As a result, the banks would have been left with the CDOs and stuck with their continued declines in value . . . In that respect, Geithner’s opening of the spigot of taxpayer cash for AIG was more of a bailout of the banks than it was for AIG itself.”

When looking at it from this angle, there is some truth to Greenberg’s argument. AIG received a far worse deal than many other bailout institutions. In addition, the bailout of AIG was a means to bailout the rest of the financial system. But then again, the bailout of any single too-big-to-fail institution is a means to bail out the rest of the system. That’s the point of “too big to fail” in the first place: The failure of one institution will cause the failure of the rest.

But you have all your work ahead of you if you then intend to argue that because some Wall Street institutions were treated too nicely during the financial crisis, that taxpayers owe AIG shareholders $25 billion dollars. That conclusion is laughable simply on the basis that if the AIG board wanted to reject the bailout terms and take the firm into bankruptcy, it could have made that decision in 2008. And nowhere in Greenberg’s 50-page complaint can you find a rebuttal to that simple logic.